Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Saturday, June 29, 2013

Goodle Reader is set to close on Monday, and like me many have complained about the selfish decision of Google to trim services that are not profit making. People were hoping Google would reverse its decision given the loss of goodwill, but to no avail.

While I have a good substitute in the Old Reader, one can wonder what less substitutable Google service could be next on the choppimg block. That would be a service that provides little ad revenue and little information useful for ad optimization. Among the services I find most useful, Gmail and Google Maps seem safe. Google Scholar is not, as I do not see how Google an find something profitable in this rather niche product. But at least there is a good substitute for economists. Google Translate. however, has no viable substitute and I see no business case for it.

Friday, June 28, 2013

Economists do not dismiss theories easily. Although Popper taught us that once a falsifiable theory is reject by the data we should move on to better theories, it takes a lot of rejections for economists to move on. This may have two reasons: first, we all know that there can be serious issues with the data as we almost never have clean experiments to draw from. We are thus more tolerant for theories. Second, we tend to think that if a theory is rejected, we need to also propose a new one that is consistent with the data. That is quite a challenge.

Ronen Gradwohl and Eran Shmaya build on this second argument to amend the falsifiability criterion of Popper by adding a new one: that each rejection by the data be accompanied by a short proof on the inconsistency. If I understand this right, it would not be sufficient to show that the theory predicts, say, a positive relation between two variables, and the data finds a negative one, one also needs a convincing sketch of a proof that would convince a court that the data is indeed identifying the right relation and that it is relevant for the the theory. And this needs to be short because courts (or the scientific community) are busy. It seems we are doing it all wrong in Economics, as our arguments are excessively long, and getting longer. This is at least in part due to the fact that we require not just a short proof, but an extensive, complete one, and then we are still not convinced. Are we overdoing it? Possibly, at least the length and complexity of papers in Economics are becoming too much.

Thursday, June 27, 2013

We live in an increasingly global world. As production moves to where capital and labor are the cheapest, we should be expecting a convergence of incomes across the world. Know-how and technology also flow more rapidly from leaders to followers, which should reinforce this convergence. Thus, unless something is really messed up with other factors of production (institutions, climate, ...), we should observe convergence. Yet it has not happened as much as one would have expected, quite to the contrary. What is wrong with my reasoning above?

Diego Comin and Martí Mestieri focus on the diffusion of 25 technologies across 132 countries over two centuries. They conclude that the adoption speed of new technologies has indeed increased faster in poor countries, but not the penetration rates (once diffusion is completed). That means that while countries first use new technology earlier than before, especially developing ones, the later use the technology relatively less throughout the economy. This has an ambiguous impact on convergence, but with a simple model Comin and Mestieri show that the latter effect is predominant, and how. With their numbers they can justify a multiplication by 3.2 of the income gap between rich and poor countries over the last two centuries, that is, almost all of the fourfold increase in that gap observed in the data. One more reason to wean the poorest countries off the illusion that they must grow a healthy agricultural sector, which uses little technology on land that is not well suited for agriculture in the first place (more). They need to jump to stronger manufacturing and adopt more technology throughout the economy.

Wednesday, June 26, 2013

Many are worried that generous unemployment insurance benefits lead to moral hazard: the unemployed do not search hard enough for a new job because the benefits give them excess security. These benefits may also have other consequences. It is known that people become much better with managing a smaller budget once they retire because they have the time to look for shopping bargains and they can substitute goods bought on the market with good produced at home. In the case of the unemployed, we covered bargain shopping before, now let us discuss home production.

Bülent Güler and Temel Taşkın use the American Time Use Survey and find that more more generous state unemployment insurance benefits are, the less time unemployed workers spend productively at home (We have shown before they spend a lot of unproductive time). Indeed we can understand home production as a different insurance mechanism which can be a substitute for unemployment insurance. Of course, there is also the extreme case in home production insurance, living with your parents.

Tuesday, June 25, 2013

Bank runs occur when depositors believe a bank is insolvent. They rush to withdraw their deposits before everyone else as funds dry up. Who is first in the queue at the wicket? When such panics break out, they must originate somewhere, whether justified or not. In particular, somebody must have had some privileged information that there is a problem with this bank. I doubt bank runs start as the bank releases its latest numbers and everybody is surprised.

Rajkamal Iyer, Manju Puri and Nicholas Ryan got access to the deposit withdrawal logs from a bank that has been subject to two runs. The last one is particularly informative, as a regulatory audit found the bank insolvent, and despite this information being private the bank run ensued. It is then no surprise to see bank employees as the first ones to withdraw their funds, followed by depositors with uninsured funds, who are the most vulnerable and may have been tipped off by some employees. Insider information appears unavoidable and leaks to the public. It appears difficult to avoid a run when a bank is indeed insolvent, unless it comes as a sudden development over the week-end. As a policy maker, this means that you better make sure banks never become insolvent, or you end up always insuring the bad risks, those that do not have insider information.

Monday, June 24, 2013

Everyone is familiar with homo œconomicus, the greedy economic agent that brings an economy to its most efficient allocation under perfect circumstances. But circumstances are less than perfect (externalities, imperfect competition, lack of commitment, asymmetric information, etc.) and Adam Smith's invisible hand needs a little help from some authority. Through regulation, taxation, subsidies and punishment, that authority can try to get closer to the first-best allocation, but at a cost.

According to Dirk Helbing, this cost is now overwhelming, because in current societies top-down management of an economy is not computable anymore. One should rather find a bottom-up approach, following the craze about Web2.0 and social media. Thus enters homo socialis, an economic agent who is very aware of all the ills of unfettered markets. If this sounds like one of those revolutionary solutions that would end world hunger, it is. It even comes with a new type of money, a must for these types of exercises.

So, how does this work? Homo socialis is an economic agent with other-regarding preferences. He needs institutions that allow him to express such preferences instead for reverting to the greedy homo œconomicus. Hence the institution of "qualified money" that rewards good behavior by this friendly and altruistic market participant by giving him "reputation." But if he is that altruistic, why does he needs such rewards? That is not clear. And who gives them? Is there any budget constraint here? It would really help to formalize a little bit all the author's ideas, but it is quite confusing. For example, the value of qualified money depends on its history. In other words, every single banknote may have a different value, depending on the context in which it was used. How is that simplifying the problem of complexity?

Helbling gives as as example the management of traffic lights in a city, a rather bizarre example. In the homo œconomicus scenario, an authority sets traffic light patterns and does not adapt them when lines become too long somewhere. In the homo socialis, this adaptation happens, presumably from a feedback coming from car drivers. Why the restriction in the first scenario? In fact cities do have feedback rules in place (notice the cameras along the roads?) without the drivers needing to do anything. But foremost, why such an example? It is unrelated to the question at hand. The argument that the computation would be too complex for a central planner fails because at least he has a complete picture. Individual car drivers suffer from a lot of asymmetric information when taking decisions, even altruistic ones. Note also that the example does not use the crazy qualified money scheme.

What a confusing and confused paper. You would think this would be a first draft for someone who works for the first time in the area. But no, except for the methodological silliness and conceptual errors, this paper is actually quite well written and the literature well researched, including 22 self-citations.

Friday, June 21, 2013

Many countries have some sort of rationing system in place for their dairy industry, because apparently farmers have a tendency to produce too much milk and depress its price, in the end getting less, I guess because the price elasticity of demand is high. This rationing is typically done through a quota system, and these quotas are sometimes tradable. This last point is important as it makes it possible for the allocation to be efficient: the most efficient producers should indeed acquire more quotas, which they buy from the least productive farmers.

Rebecca Elskamp and Getu Hailu tell us this is not at all what is happening in Ontario, Canada. Elskamp and Hailu identify quota net buyers and sellers and they try to match them with various characteristics. As the milk sale price is uniform, it must have to do with production and costs. The latter do not seem to matter at all. Scale does, though. Thus, if you are a farmer who happens to have an empty barn, you buy quotas whether your costs are high or not. But if you are a very inefficient farmer with high costs, you do not think of selling your entire quota and live from it. Strange.

Thursday, June 20, 2013

The optimal taxation literature has come up with incredibly complex and non-linear taxation schemes that have no way of making it into policy. The most complex tax code, the US one, is not complex because that would be socially optimal, it is complex because of special interests. Complex code does not make it past the politicians because they do not understand it, because it appears not to be transparent, or because its mathematical complexity scares everyone.

Marcus Berliant and Shota Fujishima claim rather that the lack of complexity on the tax code has to do with sluggishness. Governments can simply not adapt the tax code as fast as conditions change. Of course, they could also set up contingent rules, but I suppose that this is deemed opaque and subject to interpretation. Anyway, one consequence of this sluggishness is that optimal taxes start looking very different. A typical result of standard theory is that the top earner should have a zero marginal tax rate, so as to encourage this most productive person to work more. But when this person changes from period to period, or if this is the same person but he does not reach the maximum income every period, the result does not carry through. The top marginal tax rate needs to be positive to leave some headroom. But the marginal tax rate is still declining at the top. In a way, this is achieved in many countries by allowing for "loopholes" that makes it possible for the most productive people to pay less taxes.

Wednesday, June 19, 2013

Theory tells us the law of one price should hold: the same good should have the same price throughout the world after taking into account exchange rates (and transportation costs). Yet, there is plenty of empirical evidence that this is not true. And anecdotal evidence, too, think of how it is noticeably less expensive to live in developing countries. Why?

Daniel Murphy offers a new and simple explanation: complementarity between tradable and non-tradable goods. In a rich country, more non-tradable goods are available as complements, thus providers of tradable goods can charge higher prices if competition is not perfect. This conjecture is supported by empirical evidence showing that where more complements are used the prices of tradables are also higher. But given that the extend of complementarity seems to change from one country to the other, it seems to me that we are not really talking about the same good. We may measure it as the same good, but people seem to perceive it as a different good. It is just a measurement issue.

Tuesday, June 18, 2013

Pier Luigi Porta reports that there is currently a lively debate on the legacy of Piero Sraffa's research and its contribution to modern economics, all this in conjunction with the opening of Sraffa's archives twenty years ago. Sraffa's major work was published half a century ago, and it influence economic thinking back then. But Economics moved on, we found new techniques, models and evidence. What is the purpose of going back to outdated theories? I realize that sometimes you need to take a few steps back when you realize you got into a dead-end, but that does not mean one should worship old science and look for its traces everywhere.

There are, however, circumstances where the history of economic thought is useful. For example, there certainly are some fads in economic research and it would be useful to learn how they emerge. Fads are a waste of time and should be prevented. It can also be useful to understand how some people can lead economic thinking onto a particular path, especially when there are some self-interests attached (and the path turns out to be a dead-end). But this is more about group psychology than hero worship.

Maybe someone can help me understanding why we need this debate about the importance of Sraffa in current economic thinking. I do not see it.

Monday, June 17, 2013

People make dumb financial choices often because they miss some of the most elementary notions of finance, and they even realize that. Yet, it is extremely difficult to get them to sit down and learn something about elementary finance? Why? Is it because their is a stigma? Because it is horribly boring? Because they have better things to do? Because they do not see the point of it?

Miriam Bruhn, Gabriel Lara Ibarra and David McKenzie tried to coax people into a financial education class in Mexico and found it very difficult. They tried with substantial monetary incentives and still achieved little. Even more disheartening, those they managed to get through the door retained very little: they saved more, but only for a little time, and their borrowing effort was unaffected. Sad.

I wonder whether there is comparable data for developed economies that were recently rattled by the financial crisis. People must have realized that financial education matters. Did they improve their financial literacy? Give me some hope.

Friday, June 14, 2013

In developing economies, a substantial fraction of the economy stays informal, that is, unregulated, untaxed and unprotected. Why so? One could argue that they want to avoid red tape and corruption. Or they may find the the benefits of formality, like better access to credit or payment systems, courts and insurance, do not outweigh the costs being visible to the state, like workplace regulation, taxes and competition with untaxed businesses.

Suresh de Mel, David McKenzie and Christopher Woodruff perform an experiment in Sri Lanka wherein firms are offered various incentives to formalize, from simple administrative help to lump-sum payments corresponding to two months of profits. Helping with the red tape does not change much, however payments got up to half of the firms to formalize. The threshold to formalization seems rather low in monetary terms, and may also include some path-dependence. From post-experiment interviews with participating firms, the authors learned that the formal firms not change their profits much, but owners felt more legitimacy and they report more confidence in the state. Thus, they are unlikely to return to informality. And if this were to happen at a greater scale, I surmise this would have importance scale effects in formalization, as formal businesses would fear less informal competition. Formalizing an economy may thus be relatively cheap to achieve.

Thursday, June 13, 2013

The general thinking is that if you want to create a monetary union, a strong prerequisite is that the business cycles in the involved economies should be well synchronized, among other criteria. The reason is obvious: it allows consensus regarding monetary policy. This synchronization may arise after the merger, though, facilitated by the currency area.

Periklis Gogas looks at the Euro-zone and comes to the conclusion that synchronization has increased, especially with the last global recession. While the paper has plenty of robustness exercises, I fail to be convinced, though. Indeed, this supposed trend is based on two, maximum three, business cycles. And the last recession was of a different kind, being global, so it is difficult to avoid having it more synchronized than any other in the sample. You may argue that there are 86 quarterly observations and this is sufficient for statistical significance. But when you look at such questions, it is turning points that matter, and you only have a handful, and they do not look like a random sample of the population.

Wednesday, June 12, 2013

There was a time where females had little attachment to the labor force, and employers also considered them to be the easiest to dispense with in the case of a downturn. These lead to a gender unemployment gap, with females proportionally more unemployed. Times have changed. Females are now in many households the main breadwinners and thus more attached to the labor market than men, even during recessions. This has manifested itself in full force during the last one, which has been dubbed a "mancession" by some because the unemployment rate rose more for men than for women. That was new, and needs an explanation.

Stefania Albanesi and Ayşegül Şahin use a three-state labor search model to understand the data in various OECD countries. They confirm that the change in relative labor attachment explains the disappearance of the long-run gender unemployment gap. At business cycle frequencies, and in particular during recessions, the key is in the sectoral distribution of the female and male workforce. And as this distribution evolves, females benefit from more employment stability than men. Is this last recession a breakpoint for the labor market? There are so many things that are different from before, like super-low employment rates, hysteresis, and declining labor income shares. This all points to structural changes, and we should forget getting back to pre-recession labor markets.

Tuesday, June 11, 2013

We continuously take economic decisions. Most of the time, they are trivial. Sometimes they are important, and any sensible person thinks hard before settling on an option. Purchasing a home is complex, for example. Can one afford it? Is it the right price? How will it evolve? How is the financing? Comparatively, refinancing a mortgage is relatively easy: what is the interest saving? What are the fix costs? How long does one expect to hold this mortgage?

Yet, it appears a substantial fraction of those refinancing their home mortgage make lightheaded mistakes, according to Sumit Agarwal, Richard J. Rosen and Vincent Yao. Using a dataset that covers homeowners who only refinance to reduce mortgage payments, they find that 52% pick the wrong interest rate (off by at least 50 basis points) and 17% wait at least six months too long, likely because they do not monitor rates. That could be excused by inattention, but when you consider the amounts involved, they would need to have some very lucrative alternative uses of their time. That is quite disappointing for those who model optimizing agents.

Monday, June 10, 2013

Anytime you apply a distortionary tax, it bring well-being losses from the distortion (although the revenue can be used for well-being enhancing public goods). In addition, there are social losses that arise from the fact that people try to evade the tax by shift to other goods, go informal, or in the case of income shift compensation to non-taxable benefits or other amenities like more flexible work hours. Traditionally, the literature has evaluated the deadweight loss from taxation by looking at the income elasticity of the tax. That may be too simple a statistic in this case.

Brendan Epstein and Ryan Nunn show that ignoring the endogeneity of the non-taxed benefits and amenities leads to serious biases in the income elasticity and thus deadweight loss, to the point that it provide not good guidance on how to set tax rates. They basically do this by providing examples: build simple models, calibrate them, generate data from them and show that the usual empirical method provide crassly wrong estimates. An econometrician could in principle do better by taking all this in account, unfortunately data will be very hard to come by for this.

Friday, June 7, 2013

Collective bargaining has a few advantages over the alternative, each firm bargaining individually with each trade union. It allows to internalize externalities in the bargaining process. It reduces negotiation costs per firm and union, although it may take longer than for the alternative. However, it prevents individualizing contracts to local circumstances, something that becomes more important as the workforce is getting more human capital and more specialized. Finally, there is that thing with market power.

Xiaomin Cai, Peter Gautier and Makoto Watanabe try to disentangle some of these costs and benefits within a on-the-job search model where both sides are heterogeneous. There is a wage than a planner would use in this context, and it is uniform. However, absent the collective bargaining, you would want wage heterogeneity, because this allows for firms to signal to workers that they have higher labor productivity. Thus, it is better if firms cannot commit to the uniform wage of collective bargaining than if they can commit. A rather unique situation where commitment is bad. And in an empirically plausible case, it is even better not to be restrained by collective bargaining altogether.

Thursday, June 6, 2013

In international trade, how is the currency of invoicing determined? This is a big deal as it determines how is carrying the exchange rate risk. Even though this can be hedged, this still has a cost. And in this context, why is there quite frequently billing in a third currency? With such a "vehicle currency," bot exporter and importer face exchange rate risk. That does not seem right.

Linda Goldberg and Cédric Tille draw a theory of bargaining over price and exchange rate exposure between exporters and importers. An important element in this theory is the market structure. To gain a larger effective bargaining weight, you need to be larger and more risk tolerant, so surprise here. Then you also bear more exchange risk. Also, the size heterogeneity of firm on a market matters as well: the smaller firms then inherit the bargaining characteristics of the dominating ones. It would be interesting to see a test of this theory.

Wednesday, June 5, 2013

Various religions have different prescription on how rich people should be. Early Christians advocated low wealth and much redistribution, modern American Protestants seem to lean more towards wealth accumulation and little redistribution, to cite some extremes. What impact does religion have on savings behavior? Of course, nowadays it matters how religious people are. Conditional on a high level of religiosity, the religious affiliation should then matter. Earlier work using the PSID yields results that are puzzling to me: atheists save less.

Can new work by the same author, now going by the name of Anja Köbrich León, with the same dataset be illuminating? Well, not quite. In fact, the results do not seem to be robust across econometric methods, indicating some serious endogeneity issues, as has been hinted in the comments of the first post. So there, I had good reason to be puzzled.

PS: the earlier work is not cited in the extensive literature review. Is Anja hiding something here?

Tuesday, June 4, 2013

Humans are social animals and they benefit from interactions with others, most of the time. Personally I enjoy spending time with family, colleagues and neighbors, although I get really frustrated with anything related to politics, as may have transpired on this blog. Does this very anecdotal evidence generalize?

Stephan Humpert takes a German survey and checks how membership to various social groups effects life satisfaction. It is not a surprise there are stark gender difference, although not necessarily the way I would have thought. For example, men are particularly enthused by hobby clubs. Women particularly enjoy parents associations and citizens initiatives, and also sports societies, 26% being members in those. So much for the image of women being uninterested in sports. However, they dislike being in trade unions. Well, trade unions may follow peer pressure at work and may be understandable. Politics are rather neutral in terms of satisfaction. I guess Germans do not get as frustrated as I do, at least those involved in politics.

Monday, June 3, 2013

Universities encourage study abroad programs because it is a good experience for students to learn about others cultures (and in the case of expensive colleges, a cheap way to make money while students continue to pay tuition). With the Erasmus program in Europe where local tax payers typically foot most of the bill for higher education, the question arises whether it is worth paying for the education of foreigners. Of course, there is a chance that they would stay and thus only one year of all their education has been paid. And this does not necessarily have to be a zero-sum game, as the international education should be enhancing. Oh, and the Erasmus program also seeks to establish more pan-European ties, so there is a political motive at least.

Jan Bergerhoff, Lex Borghans, Philipp Seegers and Tom van Veen try to look into the impact of international higher education using the Lucas growth model. Students study abroad if they find it in their interest, which in this model means that they can benefit from higher human capital in the other country, implying a faster human human capital accumulation the more foreign students there are. The probability the students are staying is then exogenously calibrated. The authors find that the impact on growth rate should be positive, while still modest at current internationalization rates. on a personal level, i can only recommend study abroad, it has certainly helped me, even though my host country probably did not get much out of it.